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Government threatens tax avoidance

Philip Fisher raises the alarm about two government papers which could change the face of tax avoidance forever.

2nd Apr 2020
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Cartoon businessman running away from tax collector. Vector illustration on tax evasion concept.
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The timing was unfortunate, but just as coronavirus was beginning to grab all of the news headlines, the government published two documents that could change the field of tax advice forever.

Practitioners will have differing opinions about the policy papers. Some will welcome greater clarity, while others will be angry about an intended attack on several methodologies – and those who market and implement them. The paper calling for evidence on tax advisers could actually be good news for qualified professionals.

It seems that the government’s main targets are those who give tax advice without being properly capable of doing so. While this could include a small minority with ageing professional qualifications, it is much more likely to apply to the unregulated.

One possible future envisages a time when only those with appropriate qualifications can operate as tax advisers. Most practitioners would probably welcome that. A less attractive prospect would be the idea that HMRC could ban advisers whose work does not accord with their own value systems. That leads into the other document on tax avoidance, which is likely to be far more controversial with members of our profession and others that advise on tax matters.

Tax avoidance

The government sets out its stall in uncompromising terms:

“Tax avoidance is bending the tax rules to gain a financial advantage never intended by Parliament. It involves contrived and artificial transactions that serve little or no purpose, other than to reduce the amount of tax someone pays, and it deprives important public services of the funding they need.”

Every time I write an article about tax avoidance, readers are at pains to point out that tax avoidance is perfectly legal. I don’t know how to break this to you, but that has not been the opinion of those in the Treasury since George Osborne was Chancellor of the Exchequer, and probably long before. The official view is that “tax avoidance” equates to an abuse which is much closer to tax evasion than legitimate planning and rearrangement of an individual’s financial affairs.

The policy paper is packed with examples of avoidance, particularly targetting the various loan schemes. To play the devil’s advocate, it is hard to believe that Parliament intended individuals to stop receiving a salary, take a loan instead and pay little or no tax.

The fact that the powers that be were unable to draw up legislation to prevent such behaviour should be regarded as an indictment on the various governments, but does not change what has become an increasingly common view. Trying to recover taxes saved in this way retrospectively is another matter and that will be determined by the law. Realistically, that is literally history.

Closing the loopholes

There is an obvious issue that the tax avoidance document raises and which we all need to consider. The desire to minimise tax liabilities by use of loopholes in the law characterises the more extreme tax avoidance schemes that succeeding governments have sought to outlaw. There seems surreal intent on the part of government to clamp down once and for all.

A clear distinction exists between pure vanilla arrangements such as transferring assets around families in an attempt to save inheritance tax, and creating a series of artificial arrangements that take money out of the tax system against the original wishes or intentions of Parliament. It seems inevitable that over a period of time, the government and HMRC will begin to introduce new legislation that gradually eats away at many of the schemes that are currently in operation. Sadly, it is inevitable that such action will sweep up some perfectly respectable arrangements while stopping many more upon which the vast majority of the population would very reasonably frown.

The government is clearly of the view that the avoidance industry has gone too far and we only have ourselves to blame. In particular, they take umbrage at mass marketing of schemes by promoters and enablers. Up to a point, they are probably right, but that will become irrelevant when they introduce laws with which we are all obliged to comply.

Sadly, rather than simplifying the tax system, which would be an obvious way to achieve this goal, legislation is likely to become even more complex and certainly harder to interpret, if a number of the ideas about following the will of Parliament are enacted, guaranteeing that some of the best laid plans of mice and men end up spending years going through the courts.

Replies (11)

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By carnmores
02nd Apr 2020 17:56

The new world order

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By lincolnartist
03rd Apr 2020 11:22

About time. Why should the very well-off who could pay the "regular" amount of tax and NI and still be very very comfortable pay a smaller percentage than the rest of us.

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By Sanjeev Nanda
03rd Apr 2020 12:40

Catching the middle-class for tax avoidance is criminal; the wealthy class, necessary. The center seems to be interested in re-filling their coffers once this entire pandemic ordeal is over. A lot of the economy is bottle-necked by the very rich, who exponentially grow their wealth every passing quarter.
~Sanjeev Nanda

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By johnjenkins
06th Apr 2020 09:59

So the "bloke down the pub" (when the pubs open again) is really going to get hit.

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By Ammie
06th Apr 2020 10:08

All very fair, but does it also work the other way around?

Where tax or penalties have been enforced in very unusual circumstances where enforcement of the legislation is clearly not in the spirit or underlying intention of the law.

I had one such case only a couple of months ago. HMRC were not interested, "the law is the law", end of story.

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By johnjenkins
06th Apr 2020 10:39

Oh by the way Phillip, "artificial non transactions or schemes that contain artificial elements or anything of that ilk" is TAX EVASION not tax avoidance. There are many instances of tax avoidance that are totally legal and good practice. Why should you set your stall out to pay the highest tax possible. Let's take an easy example. A self-employed person is always in the 40% tax bracket. They have no option but to pay. They incorporate (they don't need to take all the profit out) and avoid paying the highest rate of tax. Nothing artificial, but tax avoidance. Unfortunately, in order to get their message across, HMRC have labelled tax evasion and avoidance under the same banner. If you want to look at it another way there is no such thing as "tax avoidance" just normal common sense and evasion.

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By tonyaustin
06th Apr 2020 11:03

I've been a tax practitioner an awful long time. I've seen tax avoidance schemes come and go and heard the HMRC complaint over and over. Use of schemes seems to peak when tax rates go up (I remember 98% on personal investment income and 52% corporation tax!) and drops off when rates are lower (they went down to 40% and 20% and the total tax collected increased). One of the problems is that nobody really knows what Government intended when passing the legislation, including the MPs themselves, because they didn't fully understand it or work out how it might be avoided or taken advantage of, before they passed it.

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Replying to tonyaustin:
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By johnjenkins
06th Apr 2020 11:32

Come on Tony, you've been in business long enough to know what is artificial and what is real. Unfortunately there are some "clever dicky Accountants etc" that think they can pull the wool over peoples eyes.

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By paddy55
06th Apr 2020 12:56

"Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax” (IRC v Duke of Westminster [ 1936 ] .

It seems that HMRC is out to overturn the view of tax-planning which has existed since the Duke of Westminster's case in 1936.

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Replying to paddy55:
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By johnjenkins
06th Apr 2020 14:52

Unfortunately HMRC have lumped "tax avoidance" and "tax evasion" into one. The problem is hindered by the fact that HMRC don't call anything artificial, evasion. We get "aggressive avoidance". What a load of tosh. let's make this positively clear so that all understand. If there is a scheme that is in place to reduce the tax payers liability that includes something that is artificial, then it is illegal and evasion. It really is quite simple. I'll give another example of tax avoidance. M&S pay tax on their UK profits in the UK. They pay tax on their other worldwide profits in Eire. So they have set their stall in order to pay the minimum tax quite legally with nothing artificial.

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By SXGuy
06th Apr 2020 17:16

Why does the article appear as though it implies its only QBE tax advisers that operate avoidance schemes?

Im pretty sure the big guys arranging these sorts of schemes are not Joe blogs who's been doing tax returns for 20 years.

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